The UK and China have reached a new fintech agreement

In the latest example of cross-border cooperation between governments on fintech, the UK and China agreed to form a fintech bridge on Thursday, as part of a series of new measures to strengthen economic ties between the countries.

The UK already has such agreements with South Korea, Australia, and Singapore.

The fintech bridge will serve to strengthen regulatory cooperation and two-way market access for British and Chinese fintechs. It will be underpinned by a co-operation agreement between UK regulator FCA and the Chinese central bank and regulator, People's Bank of China. The agreement will facilitate information sharing on financial services innovations in both markets, including emerging trends and regulatory developments. The aim is to reduce barriers to entry to each market for fintechs, as well as encourage wider innovation in their financial services sectors.

The UK is likely doing this to secure a buffer against struggling relationships with Europe. To date, the UK has focused on APAC countries when establishing fintech bridges. We expect this is a strategy to secure new markets in which UK fintechs can scale as the country's relationship with continental Europe deteriorates due to Brexit, and it grows less probable that UK firms will be able to retain their passporting rights.

However, strengthening ties with China carries risks. Most of the UK's existing fintech relationships with other countries position it as the dominant partner, given its established status as a global fintech hub. However, China has an arsenal of giant companies like Ant Financial and ZhongAn. If they are allowed to enter the UK market, they might squeeze out local rivals. Chinese companies, which are often state-backed, have enormous resources at their disposal to expand into new areas and monopolize the market.

Fintech regulations in the U.S. have been extremely restrictive thus far, but those in Europe have proven successful and allowed the region to become a hub of financial technology innovation. The U.S. would be wise to examine the policies in place across the pond and consider how to implement similar ones within its own borders.

The fintech industry is booming, with VC-backed fintech investment growing 106% to reach £10 billion ($13.8 billion) in 2015. But the new business models fintechs are bringing to market also need to be regulated, and the old models aren't sufficient. The approach regulators take will have a significant impact on how big fintech gets and how fast it gets there.

Sarah Kocianski, senior research analyst for BI Intelligence, Business Insider's premium research service, has compiled a detailed report on fintech regulation that explains how regulators in Europe are successfully growing fintech innovation and how it's becoming a model for regulators around the world.

Here are some of the key takeaways from the report:

The financial technology sector is booming, and Europe is a leading region for growth. VC-backed fintech companies in Europe raised £1 billion ($1.5 billion) in funding across 125 deals in 2015.

With this boom in funding comes a need to regulate the nascent industry. There are a variety of approaches — active, passive, and restrictive — that regulators can take. The EU and the UK, in particular, have taken an active approach, in order to encourage growth.

The regulation that will have the most impact on the European fintech market is the Second Directive on Payments Services, known as PSD2. It will force banks to open up their systems to fintechs. This will allow fintechs to act as intermediaries between banks and their customers.

The UK regulator is actively promoting its approach to regulation as a model for other countries to follow. Some of its innovations are already being copied by other regulators around the world.

In full, the report:

Examines the different approaches to fintech that regulators can take

Explains the key EU laws that will affect the European financial services industry in the next two years and beyond

Explores the potential impact of new regulations

Details the workings of the initiative central to the UK regulator's approach to fintech

Highlights what can be achieved when regulators, governments, and fintech companies work together

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